This site is dedicated to providing moderate-right opinions, and information and articles that counter some of the nonsense being inculcated in our young people by public schools and by many colleges and universities. It rejects multiculturalism, embraces the melting pot and celebrates the idea of America. *Vi er all Dansk nu.*

Wednesday, October 01, 2008

Some Relief Already Provided Financial Institutions

A reaction to the Enron and World Com scandals of the early 2000's was the Sarbanes-Oxley Act of 2002. A provision of Sarbanes-Oxley called “mark-to-market” that exacerbated the problems facing financial institutions holding mortgages and mortgage-backed packages – has just been modified by the Securities and Exchange Commission. Some are saying that this action, together with an increase in FDIC limits, could remove the necessity for the kind of bailout package that was rejected by the House of Representatives, although new and tighter regulations are still needed.

SEC cheers finance companies with mark-to-market ruling

The Securities and Exchange Commission brought some much needed cheer to the US financial sector after issuing accounting guidelines that could help curb the billions of dollars of writedowns reported by the country's leading banks.

The US regulator told banks that despite fair-value accounting regulations they did not have to use only fire-sale prices to value bad assets but could also use their judgment.

The move led to a late rally in US stock market with the Dow Jones index up 485.2 to 10850.7 while the S&P 500 rose 58.3 to 1164.7, its biggest one-day rise in six years.

Fair-value accounting requires companies to value their assets at current market prices. Banks have been forced to push through billions of dollars of writedowns in recent months after valuing assets at the same prices raised by ailing companies undergoing last-ditch sales.

"If you plan to hold an asset to maturity or at least for the foreseeable future, why should you be forced to value it at the same price being realised during the worst financial crisis in living memory?" said one trader.

Fair-value accounting has come under growing criticism in recent days amid claims it has unjustly forced banks to write down tens of billions of dollars of assets that could regain their value in the years ahead.

Nicholas Sarkozy, the French President, is expected to call for a relaxation of fair-value accounting regulations in Europe, while former US Treasury Secretary and Citigroup adviser Robert Rubin has also blasted the regulations and called for change.

The SEC said companies can rely more on their own judgments, such as expected cash flows, in determining the current value of assets that are not being traded.

The SEC was forced into issuing its statement amid confusion among banks over how to account for under pressure assets such as mortgage backed securities.

Regulations appear to guide that if there are sales of a financial instrument, they should be considered when valuing assets and take precedence over internal pricing models. However, companies are allowed to ignore "forced liquidation" or "distress" sales.

Banks have called for a suspension of fair-value accounting, arguing that they should be able to use internal valuation models until the worst of the financial crisis is over, but such a move is likely to be resisted by the SEC.

Some commentators suggested last night that the SEC's move was in direct response to concerns among Republican politicians about the size of the US Treasury's $700bn (394bn pounds) bank bail-out package.

Some Republicans are thought to be hoping that the Treasury will reduce the size of the bail-out plan in the expectation that fewer asset writedowns would be necessary under revised accounting regulations.

The US Financial Accounting Standards Board, which sets accounting rules, is set to meet to discuss fair value accounting issues today.

3 Comments:

What Congess needs to do is get someone who is knowlegable about finances like David Ramsey or Steve Whynne to sit in and produce a plan for them. You'll notice that I didn't mention Alan Greenspan. Both parties need to take their recommendations and produce something that they can vote on with no christmas tree ornaments. For instance; Dingy Harry Reid had a poison pill in the last bill that prohibited using shale in South Dakota to produce oil, so I'm told. You can really tell that he's serious about this finantial crisis, can't you? What a joke, and the people don't even see this! My hate for Liberals keeps growing.

Relaxing mark to market accounting maybe the thing to do, but I hope FASB and the SEC are going to keep a very close eye on any changes they allow. This could be a license to steal.

I don't think that increasing FDIC limits is a bad idea. It's very popular with small banks who I'm sure are letting their congressional reps know that, but I fail to see how that will help the current situation.

About Me

Russell Wilcox is a retired college professor who spends several months in Florida and several months in Rhode Island each year, and whose interests include boating and sailing, sports, political activism, ballroom dancing and bridge. He has an MBA from Harvard, a Computer Systems CAGS from Bryant and a BS from Northeastern. He has worked in industry for EG&G and Texas Instruments, operated his own business with more than 200 employees, and served as Director of the Computer Information Systems Program for Stonehill College. An Army veteran and private pilot, he is a published author, and is the proud father of four children and the proud grandfather of seven grandchildren and one greatgrandchild. A holder of two patents in microchip connections and a true product of the melting pot, his father is the son of a Yankee farmer, and his mother the first generation daughter of Italian immigrants who retained their culture, but strove mightily to become Americans, sending four sons to fight against Hitler and Mussolini.